Distributor Margin: How It Works, With a Price Ladder

A distributor's margin is the share of its selling price that it keeps: distributor margin = (what the store pays the distributor − what the distributor pays you) ÷ what the store pays the distributor. Stores quote their margin the same way, on their selling price, so the way to price for a distributor is to start at the shelf price and work down: take off the store's margin, then the distributor's, and what's left is what you're paid. Then check that it covers your full cost with room to spare. In the example below, a $5.99 bag of taro chips works back to $3.89 paid by the store and $2.92 paid to the maker, leaving 97 cents a bag over a $1.95 full cost. That's less than the $1.54 left selling direct, but the distributor sells four times as many bags. Below is the formula, the price ladder, the markup mistake, what else comes off, and a free calculator.

The short version

• Distributor margin = (distributor's selling price − its cost) ÷ its selling price.
• Retail margin works the same way, on the shelf price.
• Price from the shelf down: shelf price × (1 − store margin) × (1 − distributor margin) = what you're paid.
• A 25% margin isn't a 25% markup; mixing them up underprices you.
• Ask what else comes off: promotions, deductions, free product for new stores, payment terms.
• A distributor makes sense when its volume, at a smaller margin, leaves more than delivering yourself.
• TaroStack shows your margin by customer, so the distributor and your own stores sit side by side. More below.

The formula

All three are margins on the selling price at that step. That's how stores and distributors usually quote them, and why the ladder only works top down.

The price ladder

Windward Roots, the made-up taro business I use in these examples, has a distributor interested in its taro chips. The store shelf price is $5.99, the store wants 35%, and the distributor wants 25%:

The full cost of $1.95 is materials, packaging, labor and a share of overhead; how it's worked out is in overhead cost per unit. If what's left had been negative, the fix would be in the shelf price, the cost or the product, because the store's and distributor's margins don't usually bend for a new brand.

The markup mistake

Margin and markup use the same percentages and give different answers. A distributor that wants a 25% margin on $2.92 sells at $3.89; adding a 25% markup to $2.92 gives $3.65. If you build your price list by marking up, every number above you on the ladder comes out too low, and the shelf price you planned on ends up being yours to fund. The two are explained in markup vs margin.

What else comes off

The margin is only the first cut. Before agreeing, ask the distributor, in writing:

• Promotions. Who pays for a sale price at the store, and how it's charged back to you.
• Deductions. What's taken off an invoice for damaged, short or expired product, and how you dispute it.
• Free product. Whether new stores expect a free case or a first order at a discount.
• Minimums and shelf life. The order minimum, and how many days of shelf life a delivery must have left.
• Payment terms. How many days after delivery you're paid; 30 days of sales on credit is cash you need meanwhile.

Shelf-life rules matter more than they look: a distributor that refuses anything with less than two-thirds of its life left can turn a slow month into stock you can't sell. How those rules work is in minimum remaining shelf life.

Direct to stores, or through a distributor

Selling direct, the store pays you the $3.89 it would have paid the distributor, but you deliver. In the example, delivery costs 40 cents a bag in van time and fuel:

Per bag, direct wins. Per month, the distributor wins, because it reaches stores you can't drive to. The crossover is about 953 bags a month through the distributor: below that, delivering yourself leaves more. Some makers do both, keeping their nearest stores direct and handing the rest to the distributor. What stores ask of a supplier either way is in requirements for selling food to grocery stores.

Get the calculator

Download the distributor margin calculator. Type the shelf price, the store's and distributor's margins and your full cost; it works down the ladder to what you're paid and what's left, shows the markup mistake beside it, and compares direct delivery with the distributor per bag and per month. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.

Where this stops working

The calculator is right for one product on the day you work it out. Then you're selling to twelve stores direct and a distributor, at different prices, with deductions coming off some invoices and coconut oil up 12% since spring. Which customer is worth the drive, and is the distributor still leaving you 97 cents a bag, or 70? A spreadsheet of last year's costs can't say.

How TaroStack does it

TaroStack keeps every customer's orders and margins on what each bag actually cost.

The distributor is a customer. Each store and the distributor is a customer, with its sales orders, one picking list and delivery notes. A customer's days-of-shelf-life rule is kept with the customer, so a pick only offers lots with enough life left for that customer.

Margins by customer, on real costs. Each batch is costed from what you paid for its ingredients, at FIFO, divided by what came out good. Margins are reported by product and by customer, so the distributor's 97 cents and your direct stores' $1.54 sit side by side, and move when costs do. A price-creep report per supplier shows whose prices are rising.

And every lot, traceable to every customer. Lots shipped to each customer are on record, so if a distributor asks about a lot, or a supplier recalls an ingredient, one report says which customers got it and what's still on your shelves.

Customers, sales orders, lots and margins by product and customer are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

How do you calculate a distributor's margin?

Subtract what the distributor pays you from what it charges the store, and divide by what it charges the store. In the example, ($3.89 − $2.92) ÷ $3.89 = 25%.

What is the retail margin formula?

(Shelf price − what the store paid) ÷ shelf price. A store paying $3.89 for a bag it sells at $5.99 has a 35% margin.

How do I price my product for a distributor?

Start at the shelf price, take off the store's margin and then the distributor's, and check that what's left covers your full cost with a margin of your own. If it doesn't, change the shelf price, the cost or the product.

Is it better to sell through a distributor or direct?

Direct leaves more per unit; a distributor usually sells more units. Compare what's left a month each way, counting your delivery time and fuel when you sell direct.